The Deal on Tax Cuts: What it Means for You

President Obama makes a statement after meeting with Congressional leaders about tax cutsCongress had nearly 10 years to figure out what to do with tax cuts under the Economic Growth and Tax Relief Reconciliation Act of 2001 (referred to as "EGTRRA") and its counterpart, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (referred to as "JGTRRA") which were set to expire at the end of 2010. It managed to come up with a solution with less than a month to spare.

Yesterday, the White House and Congress appeared to reach a compromise that would extend the Bush tax cuts by two years. Assuming the measure passes without further tweaking (a fairly good bet), here's what those income tax measures mean for you:
  • Lower Federal Income Tax Rates Remain for All Taxpayers for Two More Years. Under EGTRRA, federal income tax rates for individuals were lowered across the board. Those tax rates will remain in place under the compromise. That means the "new" 10% bracket won't disappear for taxpayers at the lower end, while rates for taxpayers at the higher end will be capped at 35%. In terms of dollars, this means that the average taxpayer family will avoid a 3% bump next year.
  • Capital Gains Rates will Remain Steady. Capital gains rates had been lowered to 15% for long-term gains under EGTRRA (with an amazing 0% available to some taxpayers). That rate was expected to climb to 20% in 2011, but under the new plan, rates will remain "as is" for the next two years -- with a top rate for long-term gains of 15%.
  • Alternative Minimum Tax (AMT) Relief Means Fewer Americans Will be Subject to the Tax. The income threshold for AMT had actually decreased in 2010 and beyond, rather than increase to account for cost of living and other adjustments. Under the compromise package, a two-year patch will raise the threshold beyond the existing income limits: $33,750 ($45,000 if married filing jointly or qualifying widow or widower; $22,500 if married filing separately).
  • The Making Work Pay Credit Will End. The credit, which for 2009 and 2010 allowed working taxpayers to claim up to $400 for individual taxpayers and $800 for married taxpayers filing jointly in the form of a refundable credit, will be eliminated.
  • The Full Child Tax Credit Will be Extended. The Child Tax Credit was slated to drop to $500 per child at the end of 2010. Under the compromise, the credit will remain at $1,000 per child for the next two years. Additionally, the $3,000 income threshold for the child tax credit will remain in place. This means, so as long as taxpayers have one or more qualifying children and earned income of more than $3,000, a refundable credit may apply.
  • The Earned Income Tax Credit (EITC) Will Not Be Adjusted Down for Two More Years. The EITC is a refundable federal income tax credit aimed at low- to moderate-income working individuals and families. To qualify for the credit, you must have earned income from wages or self-employment. The expanded credit allows more families to qualify since the planned increase in eligibility income won't happen.
  • The American Opportunity Tax Credit (AOTC) Will Not Expire. The AOTC modified the existing Hope Credit to allow families a credit for tuition and expenses paid by students pursuing a college degree. The partially refundable tax credit was slated to drop back to $1,800 in 2011. Now, the credit remains at $2,500 for the next two years.
  • Payroll Tax "Holiday" in Place. The deal also includes a one-year cut in payroll taxes for workers, from 6.2% to 4.2%. The tax is linked to Social Security contributions, which means it's only applicable to the first $106,800 of wages. The reduction means that a worker earning $50,000 would pay $1,000 less for 2011; the payroll tax rate is slated to return to 6.2% in 2012.
While it seems as if the new plan was all about income tax, it's not. As part of the compromise plan, the Obama administration agreed to extend cuts at the top in exchange for an extension of unemployment benefits. Under the proposed law, assuming the tax cuts are extended, unemployment benefits will be extended for another 13 months.

Of course, keep in mind that these changes have been agreed-to in principle, but the ink isn't dry on the bill just yet. Check back with WalletPop for any last-minute updates!

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